達信公司 (TXT) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Textron first quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Doug Wilburne.

Please go ahead.

Thanks, Greg and good morning, everyone.

Before we begin I'd like to mention we will be discussing future estimates and expectations during our call today.

These forward-looking statements are subject to various risk factors which are detailed in our SEC filings and also in today's press release.

On the call today we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer.

Our earnings call presentation can be found in the Investor Relations section of our website.

On March 14 we completed our acquisition of Beechcraft combining it with Cessna to create a new segment called Textron Aviation.

Therefore our first-quarter results include the impact of the acquisition, including 16 days of operating results.

On this basis, Textron's revenues in the quarter were $2.8 billion, approximately flat with the first quarter of 2013.

Income from continuing operations was $0.31 per share compared to $0.40 in the first quarter of 2013.

As shown on slide 4 of the earnings presentation the net impact of the Beechcraft acquisition during the first quarter was a reduction to EPS of $0.05 per share.

Manufacturing cash flow before pension contributions was a $111 million use of cash compared to $425 million use of cash in last year's first quarter.

First quarter pension contributions were $17 million and with that I'll turn the call over to Scott.

Thanks Doug, good morning everybody.

Revenues in the quarter were up at our new Textron aviation segment and across all of our industrial businesses.

Overall manufacturing revenues were approximately flat as lower volumes at Textron systems and Bell offset the higher revenues at aviation and industrial.

At Bell we delivered eight V-22s and five H-1s compared to nine V-22s and six H-1s in last year's first quarter.

On the commercial side we delivered 34 aircraft, down from 40 a year ago reflecting timing of deliveries.

Order demand was stronger than year ago so we still expect commercial deliveries will be up in 2014.

We had a very good showing again at this year's HELI-EXPO in early March highlighted by the unveiling of our new Bell 505 Jet Ranger X. We received nearly 200 customer commitments during the show for the 505 reflecting strong customer interest in this entry level helicopter.

At HAI we also featured our new 525 Relentless which we displayed in a search and rescue configuration.

We received our first 525 letter of intent at the show for delivery of 10 units from Abu Dhabi Aviation.

They plan to deploy these units in support of a variety of missions including offshore oil and gas, emergency medical services, VIP transport and search and rescue.

Both the 525 and 505 are on track for first flight by the end of this year with expected entry into service in 2016.

During the quarter we also expanded the capability of our 429 product as we received Canadian and Brazilian certification of a retractable wheeled landing gear version of the aircraft which provides significant operational flexibility for our customers.

We also participated in the Singapore Air Show where we displayed our 407GX and 429 commercial offerings and on the military side we had an H-1Z and a V-22.

We also had a number positive development and Asia-Pacific region as we established a new sales office in Japan, announced the sale of eight 412s for the Philippine Department of National Defense.

And booked eight helicopter orders in China with options for seven more.

Finally, we were named number one in helicopter service and support for the 20th consecutive year by Pro Pilot Magazine.

After market support is a key differentiator in the vertical lift market, and we'll continue to invest and work to expand our support capabilities around the world.

Moving next to Textron systems, revenues were down as expected but we had a good program performance with segment margins of 10.7%.

We continued to make progress on the Shadow TCDL upgrade development program and we are on track to deliver production units beginning in the third quarter.

We are also seeing continued performance improvements in our Aerosonde fee-for-service platform reflecting the successful deployment of Lycoming manufactured engines into the installed fleet for which we now have achieved over 10,000 hours of operation.

Earlier this month our new aircraft simulation and training business participated in the World Aviation Training Conference where we launched our new name and brand, TRU Simulation and Training.

This reflects our mission to provide realistic pilot environment for true-to-life, ensuring pilots are fully experienced, confident, and competent when they leave our simulators.

Shifting to industrial we saw good growth at Kautex, reflecting strength in Asian and European auto markets.

We also continued to win new platforms at Kautex, which bodes well for continued long-term growth.

E-Z-GO also continued to grow its top line based on new products we've been rolling out across our golf, consumer, commercial, and after market product lines.

At Greenlee, growth was driven by continued market share expansion and our acquisitions of Sherman + Reilly and HG Electric last year.

We are currently pursuing new electric utility transmission sales opportunities with a 12 city road show to demonstrate a new product lineup highlighting how our products can support our customers' health, safety and productivity.

Also on the acquisition front we added an important new product line at Jacobsen during the quarter with purchase of Dixie Chopper, a US manufacturer of zero-turn radius mowers.

Expands our product offering to better serve the commercial and municipal market sectors.

Moving to Textron aviation, with the acquisition of Beechcraft we delivered our first eight King Airs during the last two weeks of the quarter.

We also delivered 35 new jets, up from 32 a year ago.

We were pleased that even at these relatively low volumes we were able to generate a $22 million year-over-year improvement in segment profit in the quarter.

On the new product front, our Latitude prototype took first flight on February 18th and followed on February 25th with a demonstration of its maximum flight envelope.

This included reaching a maximum speed of 440 knots or mach 0.8 and going on a direct climb to a maximum altitude of 45,000 feet with a maximum gross take off weight of 29,000 pounds.

We continue to make progress towards the 2015 entry into service for the Latitude.

We also announced the new CJ3+ which includes a state of the art, fully integrated Garmin 3000 avionics suite, a redesigned cabin and cockpit, and new pressurization diagnostic systems.

We also introduced the CJ2+ Alpine Edition, our Garmin 3000 cockpit upgrade option for existing CJ2+ owners.

Finally, Cessna achieved a notable milestone during the quarter as our installed fleet of 6,600 Citations reached over 30 million total flight hours of service.

With the Beechcraft acquisition we now have a global customer base operating over 9,000 business jets as well as over 9,000 Turbo props and over 180,000 piston engine aircraft.

With respect to Beechcraft we are estimating Beechcraft will add about $1.5 billion in revenue to the aviation segment this year.

This reflects an expectation for higher after market revenue, lower military sales and slightly fewer King Airs this year as we believe 2015's volume benefited from catch-up deliveries related to the uncertainties leading up to the Beechcraft bankruptcy.

Therefore our 2014 revenue guidance for Textron aviation is now $4.8 billion.

In terms of synergies we begin implementing restructuring activities last week and now estimate we will spend about $35 million in 2014 and reach an annualized cost synergy run rate of about $80 million by the end of this year.

On this basis and including the impact of purchase price accounting write-ups and amortization, we estimate the acquisition will add about $45 million net to Textron aviation segment profit this year.

Therefore segment margin guidance for the year remains at 2.5% to 3.5%.

To give you a sense of the earnings power of the segment going forward after adjusting for purchase price accounting items and giving benefit to full-year synergies and fully annualized results, 2014 Textron aviation margins would be about 200 basis points higher than the midpoint of our current guidance range.

While our restructuring process will not conclude by the end of year we believe we will be able to offset any 2015 costs with additional savings and remain comfortable with our previous statement that we expect the Beechcraft acquisition will be accretive by $0.25 to $0.30 per share on a fully annualized basis.

To wrap up we believe we are off to good start on the year.

We are encouraged by what we are seeing in terms of demand in the majority of our markets.

We continue to make progress with operational productivity.

Our strategy of investing new products and distribution is paying off and we're seeing good results from our M&A investments.

With that, I'll turn the call over to Frank.

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $219 million, down $16 million from the first quarter of 2013 on approximately flat revenues.

Let's look at how each of the segments contributed, starting with Textron aviation.

At Textron aviation revenues were up $77 million from this period last year reflecting $101 million of acquired Beechcraft revenue, higher jet, Caravan and after market volume partially offset by a reduction in preowned sales and CitationAir revenues.

The segment had a profit of $14 million compared to a loss of $8 million a year ago.

This reflected favorable pricing and higher Jet and caravan volumes.

Backlog in the segment ended the quarter at $1.5 billion, up $503 million from the end of 2013.

This includes a $534 million contribution from Beechcraft.

Moving to Bell, revenues were down $76 million on lower commercial unit sales and decreased V-22 and H-1 deliveries partially offset by higher V-22 product support.

Segment profit decreased $33 million from the first quarter in 2013 primarily reflecting the lower overall volumes and unfavorable commercial aircraft mix as we delivered only two 412s in the quarter.

At Textron systems revenues were down $66 million reflecting lower UAS and TMLS volumes offset by higher weapons and sensor volume.

Segment profit increased $1 million despite lower volumes reflecting favorable performance across most product lines.

Industrial revenues increased $70 million reflecting higher automotive volume and the impact of acquisitions.

Segment profit increased $9 million due to the higher volumes.

Moving to finance revenues and segment profit were down $13 million and $15 million respectively reflecting the impact of gains on the disposition of finance receivables during 2013.

Nonaccrual accounts ended the quarter at $98 million, down $70 million from the end of 2013 while 60 day delinquencies were $125 million, up $45 million in the quarter.

Lastly, moving to corporate items, corporate expenses were $43 million and we believe we are still on track for a full-year amount of about $150 million.

Interest expense was $35 million, down from $37 million a year ago, reflecting the retirement of our convertible debt in May of last year partially offset by $7 million in interest costs related to the Beechcraft acquisition financing.

Our tax rate was 30.4% reflecting a number of discrete non-US benefits in the quarter.

We are still estimating a full-year tax rate of about 31.5%.

During the quarter we repurchased 4.3 million shares through an accelerated repurchase program.

This should result in a full-year average share count of about 283 million shares.

Looking then to our full-year outlook as shown on slide 5 we estimate that Beechcraft will reduce 2014 EPS by about $0.08 per share.

On this basis the Company now expects 2014 earnings per share from continuing operations will be in a range of $1.92 to $2.12 per share.

Cash flow from continuing operations of the manufacturing group, before pension contributions, is still expected to be in a range of $600 million to $700 million.

This reflects an approximate cash neutral net operating impact from the Beechcraft acquisition.

That concludes our prepared remarks.

Greg, we can open the line for questions.

(Operator Instructions)

John Godyn, Morgan Stanley.

Scott, I was hoping now that we've had some time to digest Beech that you could talk a little bit more about revenue synergy opportunities.

You had some very good commentary on the cost synergy side.

It sounds like on a run rate basis the outlook there is that it could exceed some of the prior comments.

I'm just curious what the outlook looks like or how it might have evolved on revenue synergies now that you've had some more time?

With respect to revenue synergies it's not something that I want to really put a hard number around.

We try to base all of our synergy and math around the things we know we can control which is really on the cost side of the equation.

I'd also say from a timing perspective here we've been working pretty hard over the last few months on the cost side of things.

The team has been working together so that we were able to come out of the gate right away executing on the cost synergies.

Obviously we couldn't get sales teams together prior to the official closing so those teams are now working.

We've got kickoff events and the folks that are in the particular regions that have been selling King Airs are meeting with the teams that have been selling Citation jets.

So we are certainly starting to operate to make sure that we can take advantage of what revenue opportunities there may be.

But it is not something that I would put a number.

Obviously we feel good about the fact that we now have a huge installed base of Hawker jets and these are customers that are very important to us.

We going to reach out to them to work with them on the service front which also will hopefully over time increase our conversion rate or I guess retain those Hawker customers.

And as they move to a new jet we obviously want to see them move into the Citation jet family.

And we will do everything to make sure they have a great service experience to help promote that on a go forward basis.

But it is not that we're going to come out with any form of real guidance around a specific number on the revenue synergy side.

Outside of a specific number, in is it fair to say that directionally now that you've had more time looking at Beech and the sales forces are communicating that you feel directionally better about revenue synergy potential as we think about it long-term?

I think John we always felt that this was an important part of the acquisition and something that would be a great add in terms of adding those additional sales resources and building those relationships.

And we've only been into this now for a few weeks.

The teams have been getting together, I'd say there's a great deal of energy around it.

Each of the sessions it's been, had around the world where we get these teams together, people are very enthusiastic, very bullish on working together to get out there and just increase our coverage and build more customer relationships.

So it was without a doubt an important part of the transaction and I'd say so far as the teams have gotten together we feel very good about it.

Got it.

And then I was hoping that you could elaborate on the general biz jet commentary and specifically what you're seeing with some of the legacy aircraft types.

A lot of the data that the analyst community tracks has generally been looking a bit better.

Some people have gotten a bit excited, I'm just curious what your perspective is as you read the tea leaves?

Thanks.

Well, so key metrics continue to move in the right direction in terms of used available for sale, you certainly hear some firming around the pricing in that used market which is encouraging.

For sure the number of aircraft, and we watch this every quarter in terms of Citation fleet and what's available for sale, drop down another 40 aircraft or so as the installed base continues to grow.

So I would say in terms of trends of some of those key metrics they are all still going in the right direction.

We feel good about the fact that pricing has firmed in the used market.

We feel good about the fact that pricing is incrementally better in the new market as well.

So if I had to give overall color on a year-over-year basis, as we sat here a year ago we were saying we are a little concerned about what we are seeing in the market and we were taking production back and trying to firm pricing.

And we sit here a year later and while the overall numbers are not a lot higher in terms of unit deliveries we certainly feel better about what's going on in the market and feel a lot more confident about where we're heading here as we go into the second and third quarter than we did a year ago.

Thanks a lot.

Sure.

Pete Skibitski, Drexel Hamilton.

Congrats on getting the deal closed, it was nice to see a profit in the first quarter aviation.

Scott, I wanted to ask you about pricing.

You mentioned in the release you got some pricing on the new models -- new model Citations.

Just wonder if you got any pricing on the balance of the Citation portfolio because I know you guys have tried to be a little bit more disciplined on pricing?

We did, Pete, and in fact you see the pricing numbers here they will come out, our pricing was up on a year-over-year basis and that really is reflection of the legacy models.

The M2s and the Sovereigns, which were a good bit of the volume here in the first quarter aren't going to be in that price number because they are new models.

The price was certainly up on the existing CJ and XLS families and that number is out there.

The M2s and Sovereigns, obviously since they're new will not show up in our pricing number but certainly pricing has been better than we've seen in the past.

That's great.

And then I'm interested in your new expectations for peak margins at aviation.

It is tough to figure out what kind of the go-ahead margin rate at Beechcraft would be given its up and down history and Hawker's wound down but you've got $80 million in cost savings you're looking at.

So can you give us some color around what peak margins could possibly be for the big aviation segment?

Pete, I have to be honest, I haven't tried to do that math yet.

We've been focused here on making sure we can communicate you guys expectations in terms of what it means here in 2014 and particularly how to model it going into 2015.

In terms of peak margins, as you know, we've always talked about trying to get to a couple hundred basis points better than the past, that's obviously a little bit muddied up here because we're going to have a mix of stuff that we don't actually really know what the margins were back in those peak days because there was so much noise in all of the financials as Beech went through the Hawker issue.

It is a very complicated model, Pete.

I cannot even really go back and tell you very well an actual real percent to know what base that peak off of.

I know that's kind of a muddy answer but it's because the math is, the historical numbers always had all kinds of special charges and impacts of things, it is not an easy comparable.

Pete, I think the way to think about it is, in Scott's earlier comments about the 200 basis points adjustment for a normalized full-year run rate of the segment.

And then you make your own assumptions on what you think volumes are going to do and what the pricing environment is and I think you can come up with a view of where your margins are going to go.

Okay.

Last question, should we'd be worried that 412 was down year-over-over, and 429 as well?

I think Pete, that's just timing.

We had an awful lot of 412s that went out in the fourth quarter just based on customer demand and where they were.

So we were very light in the first quarter particularly with respect to 412s which as you know is an important part of the mix special business but I don't think that portends anything for the year.

It was just a light number of deliveries based on customer demand and delivery dates in the first quarter.

You're still thinking $4.5 billion for Bell for the full year in revenue?

That's correct.

Yes, sir.

Thank you.

Robert Stallard, Royal Bank of Canada.

Just wanted to follow-up, I think you reiterated your Bell revenue guidance there, but I was wondering if you could comment on Textron systems and whether you're still comfortable with your full-year revenue guidance for that division?

I think we are, Robert.

We are trying to stay away from quarterly guidance here but we did try to tell people the real drivers of the revenue growth on a year-over-year basis is driven in large part by the TCDL program which is really going to be a third and fourth quarter program just because that's when we're going to be completed the final testing and should be signed off in terms of starting customer delivery.

So we expected the first and frankly expect the second quarter to be pretty light in terms of the revenue line because you won't see those deliveries until the third and fourth quarter.

Okay, and then secondly on the aviation division.

I was wondering if you can give us an idea of what the lead time is on a new jet at that moment?

And whether that's started to move out a little bit?

Depends on which model.

So it has moved out a little bit on some of the models and, but if you're interested Rob, what could push up as far forward in the list as we could.

(laughter).

More on the ones where you have been operating a bit on a spot basis and whether that's stretched out a little bit?

It's still a spot basis on some of the lighter jets, Rob.

But as you get into some of the new models like the Sovereigns you're starting to build, again not a huge backlog, but these aircraft for instance, I don't think we can get you one of those Sovereigns in the second quarter.

So we are at a point here where that production line is pretty well matching what the demand is, sort of a quarter ahead.

That's great.

Thanks so much.

Carter Copeland, Barclays.

Carter Copeland, your line is open.

Julian Mitchell, Credit Suisse.

I just wondered in terms of the Beechcraft business, the lumpiness of the margin profile there during the year.

I don't know if there's anything particularly important in terms of seasonality that you wanted to call out.

But obviously the margin number, to the extent that it counts for you had in Q1 looked very high versus the kind of 7% underlying margin guide for the year.

I think Julian if you look at the numbers, it looks like a very high number because it really just reflects those last two weeks ago quarter and we had a lot of King Air deliveries which is fairly standard I think in this business.

You tend to have a fair number of deliveries right near the end of the quarter.

So the margin rate in that two-week period looks particularly high but that is because you had eight deliveries in a two-week period of time over a relatively short cost basis.

I think that's just a function of the fact that it is -- you are just looking at a snapshot of the last two weeks of a quarter.

In terms of normal annualized looking at the business, from what we've seen of its historical numbers it doesn't look terribly different than the jet business.

You see deliveries tend to be stronger in the fourth quarter than they are in the second quarter let's say.

But again, it doesn't look to us to be -- to have historically been very different than what we see in the jet business.

Thanks and then on Bell, I guess you are still sticking with that 12%, 12.5% margin guide for the year as a whole.

I just wondered if there's anything in Q1, any spillover in terms of the ERP type stuff that hurt the margins or it really was primarily around the commercial mix and that should come back?

There's both things in there, Julian.

For sure as we talked about last year as we went through the challenges on the new ERP system and the labor instructions we were running at a higher cost basis than we normally would.

And a fair bit of that did get inventoried, just because it goes and then bleeds off over a period of time.

So when we gave you the guidance around the margins we did expect that as that inventory went through and burned off over the course of year that we expected we would see about 100 basis point drag on our margin rates through the course of the year.

And in fact if we look at those things that were, those additional costs as they flowed through in the first quarter it was about 100 basis point drag.

So I think you will see roughly 1% of margin degradation in this year's performance that was a result of those higher costs that we incurred last year.

But again, that was factored into the guidance that we gave you in that 12%, 12.5% number.

Thanks and lastly very quickly R&D to sales.

You'd indicated alongside the Q4 earnings that should be a tailwind to margins this year, year-on-year, is that still the case?

Yes, I think it is a very slight tailwind and I think it remains that way as we bring Beech in, the R&D as a percent of sales is about what it is for the oval Textron company.

So no real change in terms of the overall R&D as a percent of sales.

And it is a very slight tailwind though, it is a little bit lighter at Cessna because of the lower numbers of aircraft in certification.

It is a bit higher at Bell as we have 525 and 505 and B280 all going full tilt.

Thanks very much.

Sure.

Jason Gursky, Citi.

Scott, I wanted to ask a question around the sales force, in the aviation segment you've gone through a pretty big transformation there over the last year or 18 months.

I was wondering if you could provide an update to us on the benefits that you've gotten thus far out of that transformation as you move more to a direct sales force?

And whether these guys have been able to populate some sort of pipeline into some sort of tracking system and what that pipeline looks like on a year-over-year basis?

Sure, Jason I think there's no question we've been continuing to grow our sales force both domestically and internationally.

Internationally is, as we've talked about before, adding a lot more of our own resources as opposed to being dependent on third parties to do that.

So we continue to make progress.

I think in doing that clearly the acquisition of Beech helps.

We've added a lot more sales resources through that deal.

And we've retained that sales force by the way, so there is still a team out there as it was with Beech very focused on the turboprop marketplace.

So as I said earlier we are having a lot of get to know each other sessions around the world so that the teams that have been out there selling jets and the teams selling turboprops know each other and can try to find opportunities to work together going forward, but we've largely retained all those folks.

So it's increased the net size of our sales force which I think is good.

I think we have a very good system actually that we use for keeping track of customer contacts and customer opportunities and where people are in the cycle and I would say that's the system we use and look at.

It is the system we looked at year ago to say we are not feeling that great about where things are in terms of demand.

And that's also the same system we're looking at today and saying there's a more robust set of customer opportunities out there which makes us feel better about where we heading in the second, third quarter.

So the system is quite good.

The sales teams around the world keep it pretty statused and Scott and that that team have a once a week review with all the sales folks around the world on that database and get an update on where it is and how things are progressing.

Scott, do you feel like you've been able to close more deals as a result of this direct sales force than you would have had you been using an indirect sales force?

As you look back, the year, 18 months on, is it without a doubt the right move to have made?

Absolutely.

Our indirect, our sales representatives, our authorized representatives around the world is like anything Jason.

I think we've had some that have been outstanding and they do a terrific job and we still have a bunch of those and we keep the guys that are doing a great job for us.

The thing that was -- that led us to start to do more of our direct sales around the world is that I think we had too many that were great for us when things were good but when times weren't good they had other things to go do.

And obviously when we put a direct person in, good times and bad those doesn't really matter, the person is out there selling every day.

They are not going to wait around for the overall market to become positive to go sell, they try to sell all the time and I think that we are seeing the benefits of that.

Okay, that's helpful.

Thanks, guys.

Sure.

George Shapiro, Shapiro Research.

A couple of questions.

First, Scott can you update us on where the Citation 10 stands, are we going to see deliveries this quarter, I'm not sure I've seen whether it is been certified yet?

I think this past week was the last week of flight testing.

So at this point it's now just into the paperwork process and I guess the bottom line George is yes, I would expect that the certification will happen this quarter and that you will see initial deliveries of 10s in Q2.

Okay, and then Frank, just to update, if I look back at Beech you projected EBITDA of $215 million on the December call.

Now it looks like it is gone up a little bit.

We are talking $235 million maybe, is that due to the $80 million of synergies you are talking now versus $65 million before, or if I'm wrong if you can clarify what -- the comparison?

George, I'm not sure I'm following your EBITDA comparative, but 2013 came in from historical basis pretty much on top of what we had expected.

And the numbers that we are talking about now are pretty much on top of what we had indicated at the time that we announced the acquisition.

Probably achieving the run rate synergies savings faster than what we indicated at that point in time.

But generally consistent with where we were at the time we made the announcement.

Okay.

And then one last one, you mentioned maybe a100 basis point impact from the continued labor from the follow-up of the labor issues you had at Bell.

Is that more heavily loaded to the first quarter here where the margins were down a lot more or is that just 100 basis points in the combination of the weaker mix?

That falls across the year.

It really is as we sell product and it just rolls through cost to sales at a pretty consistent 100 basis points across each quarter.

So the 100 basis points is pretty consistent, at least the way we forecast it or see it right now, George.

The big comparative 2013 to 2014 beyond that is largely driven by a mix of principally commercial, and largely 412 helicopters in Q1 of 2013 versus Q1 of 2014.

Okay, thanks a lot.

Sheila Kahyaoglu, Jefferies.

My first question was about Cessna.

I know you discussed pricing.

It seems like there is a bit of a pricing benefit for the full-year just given there is less legacy aircraft.

Could you give us an idea of maybe the gross margin differential between some of the newer products like the M2 versus the Mustang?

We wouldn't give those numbers specifically, numerically Sheila, but for sure we're going to have two dynamics I think through the course of year.

One is that we are seeing stronger pricing on those legacy aircraft, be it Mustangs, CJ2s, CJ3, CJ4, XLS product lines.

I would say on a gross margin basis the things that are not going to be reflected in pricing are going to be the M2s and the Sovereigns and the gross margins on both those products is good.

Okay.

And then the first quarter out of the gate seems like you've been successful with the new product launches.

They've gained some momentum.

I know it is a little bit early, but looking back historically it seems like new products result in several quarters of market share gains.

You have a few competitors coming out with new launches in late 2014 and 2015.

I guess does the sales force have any strategic views on this or how are you thinking about that?

I think if you look at the market historically it does, the new products do drive some market and share, we're certainly seeing that with the M2 and the Sovereign.

And I would say we see that certainly playing out through the year and I would say right now the business and the sales force I think is very enthusiastic about where the Latitude is.

That will really be what drives our growth I think in the 2015 timeframe.

So as we said, we see the market even flattish, and with respect to demand for the legacy products, so we didn't make a lot of growth assumption there.

Most of the growth driven by the introduction of new products like M2, Sovereign and 10 for the 2014 window.

And then you add on top of that going into 2015 the Latitude program, which we feel very good about.

Flight testing has gone fabulously.

We think we're very much on track for that to have a meaningful impact for us in 2015.

Okay, got it and then just a last one for me.

We saw some indications from Congress about the V-22 for carrier usage, can you maybe talk about the potential to expand the V-22 within the US Government?

Sure, we think there's a couple of opportunities that are pretty significant in the V-22 for its future.

The replacement of the so-called carrier onboard delivery vehicle we think is a great opportunity.

That's one where there's been a fair bit of work already conducted by the Marine Corps and the Navy looking at the utility of the V-22 to execute that mission.

The issue I think in the long run will really be how they decide to specify that requirement Sheila.

So if the mission is just purely to go from a land-based airport to a big carrier deck, that's a fairly narrow mission and there's other ways, including refurbishing existing equipment probably to get there.

The benefit of the V-22 is you can completely fulfill that mission but you can also go from land, any land site or any sea site to any ship because of the vertical takeoff to landing capability of the V-22.

I think it still too early in terms of where that program is.

There is not a hard requirement that's been written.

There's a lot of study and analysis going on within the Navy, So I think that program obviously is still a number of years out but we feel good about how we are positioned because frankly that aircraft can do things to fulfill the mission in a way that no under the platform can do it.

And because it is a production unit and you don't have a huge development program we also think it is a much lower risk approach than doing something like an overhaul of older aircrafts.

Obviously from our perspective you get a lot better value, you get a lot better mission, and you get a lot lower risk.

But we are a few years from knowing the answer to that question, I think.

Got it, thank you.

Shannon O'Callaghan, Nomura.

Scott I think you mentioned the Sovereign you were booked one quarter out.

Can you give a little color on how that's tracking versus your expectation and your initial plan for the year?

I think it is about -- it is basically meeting our plan, Shannon.

We expected once we've got this thing certified and the aircraft was out there and plenty of demo assets for customers to fly it that that would drive pretty strong demand and that's exactly what we are seeing.

So I don't want to say it's, the market is going crazy and you got a lineup years in advance or anything like that, but the aircraft is doing really well.

It is flying very well.

The performance has been great, customers love the new interior, the added range, the more sophisticated capable cockpit so -- so far it is playing out as we expected.

Okay.

And then just maybe on this ASR you guys did.

I guess that's a one-off in the first quarter.

Any changes to philosophy there and it doesn't look like it really has much of an impact, I guess it offsets pollution?

As we said Shannon, clearly we are committed to making sure that we do as a minimum enough stock buyback to offset the dilutive effects of all the employee programs and that's really what that was.

We just did in the first quarter to make sure we got full-year benefit of doing that.

In terms of other buyback opportunities we would continue to look at that on sort of an opportunistic basis.

But we will remain committed on a go forward basis, but as a minimum we will always take out enough to offset dilution.

Okay, great, thanks.

Jeff Sprague, Vertical Research.

Just wanted to get my arms around a little bit more Cessna mix for the year and you touched on it a little bit in your comments on the 10 and Sovereign.

But if I just look at Q1, one-third of your deliveries are M1, M2, Citation 10s start to come in, but should we actually expect this quarter to be the high water mark for Sovereign?

You caught up on a little spike and unit volumes really don't rise sequentially from here on Sovereign?

They probably won't, Jeff.

Part of this is an artifact of the fact that we certified the airplane so late by the time we got through everything in the fourth quarter.

So there were a few Sovereign deliveries that we would have preferred to have made last year, and that late certification we just couldn't get through the whole delivery process on a couple of them.

It is a bit high in the first quarter, but we should have reasonable volumes through the balance of the year as well.

Does that apply for MS also that you had a Q4, Q1 catch up and it levels off?

Or does that work its way higher sequentially over the course of the year?

I think the M2s are fairly stable through the balance of the year.

Then I was just wondering on pricing, from what I can tell it looks like orders were flattish to down slightly, book-to-bill's 0.9 or 1 depending on how you round some things.

So do you think the better pricing is negatively impacting order intake or am I'm missing something there?

No, I don't think so Jeff.

I think a lot of it is just timing related, as I said I think if you looked at the amount of activity in the marketplace, the number of customers, just where they are in the order cycle, it is better than where we were before.

So as we looked at, obviously if it wasn't a signed order book with a deposit we don't put it into the backlog.

But there were a number of deals that were in negotiation and working their way towards contract which have now been closing here as we entered into the beginning of the second quarter.

So from an order book standpoint in terms of meeting our plan, we think the trend is positive.

And just a quick house cleaning one for Frank.

So just looking at in Q1 the $14 million of PT&A step up, that's separate and apart from the $16 million of restructuring and acquisition costs, is that correct?

That's right.

Yes.

We will continue to see, that step-up will flow through segment profitability and impact the segment for the year and then you will have additional restructuring charges that we will break out separately that will be a separate impact.

Great.

Thank you very much.

Joe Nadol, JPMorgan.

Scott, just back to Bell and the 412 and the deliveries, I heard you say it was just all timing.

Could you speak a little bit though to, and maybe any detail behind that, were there fleet customers that are transitioning?

Is it literally just the dates that the customers want their aircraft and maybe just bigger picture about the demand for that specific model and what's in backlog and what you are seeing?

Sure.

It really was just timing, Joe.

We haven't seen a change in the demand on 412.

As you know a lot of times 412s do tend to be fleet orders and we had some fairly strong deliveries, just again, on timing in the first quarter last year of one of our larger fleet customers that had just scheduled a number of deliveries in Q1.

As we look through the balance of year, again 412s do tend to come in fleets as opposed to onesie twosies.

But I think in terms of customer demand, fleet orders, customer activity, that's why we still feel pretty good about the total year 412s.

And you expect to be, you did 36 last year, you still expect to be higher than that for that model this year?

Sorry, Joe, I'd have to go look at my sheets on the exact number of 412s, we usually publish that number but I don't think it is appreciably different one way or the other.

It really is just a quarter issue.

Right, okay.

And then on, maybe I missed it, but on Beech, what are the cost saves that are actually baked into your guidance now for this year?

Not annualized, but actually in the plan here?

We haven't given that Joe, and obviously, first of all, we only have nine months.

We are in the process of incurring at this point most of the costs associated with those restructuring activities.

So we are not going to break that out as a separate number but we included all that in terms of the numbers we've given you, in terms of restructuring, as well as the overall net margin number.

So I don't think we will break that out number simply other than to tell you we see it as about an $80 million run rate for next year.

I'm just trying to think about the compare going into next year compared to this year how much, we get -- the step-up I assume doesn't recur, you get a full year benefit obviously of EBIT.

But then how much incrementally do we get from the cost saves in 2015 versus 2014 if we don't know what's in 2014, it is hard to make that comparison.

That's part of the overall 200 basis point normalization, Joe.

It is part of that.

Okay.

Can you actually just run through that again, I heard that number, Frank, but I didn't quite get it in your prepared remarks, the 200 basis points?

Sure, if you look at a full-year sales impact of Beech and if you look at the impact that we expect to flow through from the purchase price impacts which are relatively modest going into 2015, but impact 2014 by about $65 million.

And then you look at the expected savings coming off of that $80 million run rate that we talked about, you would get on a same volume as 2014 a 200 basis point pickup in Textron aviation margins.

So you can --

That gives you all the elements of the number.

And the reason -- we are not trying to obfuscate anything, the reason we are doing it that way is it is hard to identify and will be hard to identify as we move forward here all of the cost savings and where things come from and everything else and we are really looking at it as a consolidated segment operations.

And just try to focus on what our cost structure will look like in 2015, and therefore, core profitability levels.

Fair enough.

And just one more.

You've talked Scott quite a bit about demand for some of the individual Cessna models and pricing.

I just wanted to to turn to something that emerged a little bit last quarter which is the competitive environment in really in the midsize area in particular.

Is this something that's getting a little better?

You've talked quite a bit in the past about how tough it is out there.

And I know you don't want to declare victory at all, but is everyone seeing things getting a little better and maybe taking a little more price across the board?

I think that's happening, Joe.

As I said, on our legacy product where we compare price on a year-over-year basis, price is up across the line so, but again, it is still a very competitive market.

Every deal is a fight, but I think as we go through that process obviously as demand is firming and a lot of us backed off in terms of how much capacity or what production run rates are going, that's had the desired effect exactly as we anticipated it would.

So we are starting to see that price firming.

Having some price firming in the used market, giving people that are out there looking to sell a little bit better collateral value as well as frankly just a stronger market so they can transact and get the liquidity.

All those things I think are factoring into just a strengthening in the overall market and therefore, as you would expect, a little bit of strengthening on the pricing side, so it is not overwhelming obviously.

We would like to see it stronger, but it's certainly improved over where we've been and that reflects in some of the improved pricing.

Thank you.

Cai von Rumohr, Cowen.

Yes, thank you, and good results.

Thanks, Cai.

Scott, you had good deliveries of the Sovereign and the M2.

Obviously some backlog spillover from the fourth quarter.

Should we expect the seasonal pattern here, because of those strong deliveries in the first quarter, that you are really flat to up in the second, flat to up in the third as you burn off that initial backlog?

And then a big fourth quarter, is that, as you think about the quarterly pattern, is that the way to think about it?

I think that's mostly correct, Cai.

That's been the nature of the business.

Obviously last year we had very challenging second, third quarters and then a much bigger fourth quarter.

We would like to see a flatter profile just in terms of it is a little easier on the business, a little more productive to run the business a little bit flatter.

But as we look through the course of year right now we would expect it to be up slightly as we move our way through the quarters incrementally.

We expect deliveries of the 10 to come in here in the second quarter as Scott indicated, which will impact things.

Right.

But I assume it is later in the quarter if you still have the paperwork to go or are you just all set so you could do you three of them in the quarter.

I think we will do several 10s.

We have customers that are standing by and ready and wanting these aircraft.

The certification as we talked about before slid from where we wanted to do it.

We would originally liked to have done it at the end of last year and we just couldn't get through that in terms of prioritizing getting the Sovereign through the process.

Flight testing has take longer than we expected and we have customers that are waiting for their aircraft.

Once we get the paperwork done we will certainly get a few deliveries here in the quarter.

You delivered eight King Airs in the quarter.

Can you give the split between the 350, 250s and the 90s?

And maybe give us some -- a little more color on where you expect those three models to be for the year?

I don't know if I have the exact number here in front of me.

It was weighted toward 350s, Cai and I think the full year will be weighted more towards 350s.

Okay.

Good.

And then a last one, so if we back out Beech, you did a 1.8% margin in the first quarter at Cessna and I think your guide is 2.5% to 3% excluding Beech, and seasonally things get better.

You are talking about pricing improving.

Is that a realistic number?

Does that have upside or is there something else happening in terms of the funding of R&D that would make that the real number and not really a bit conservative, which is the way it looks?

I think it is a realistic number, Cai.

We will, as we said, we will have a little bit better incremental volume as we go through the year, not dramatically, but I think also with the 10s coming in we have a mix that's more oriented towards a combination of 10s and Sovereigns, which is a good mix for the business.

Right, but I guess my point is, if volume is going up and you have a 25% plus incremental margin, and mix is going your way, one would think you would get a little bit more than what is it, 70 to 130 BPs off the first quarter given the seasonality you've got.

Again, as we look at this right now, Cai, we don't see significant increases in terms of quarter-over-quarter.

It will be up slightly, but not dramatically.

Got it.

Thank you very much.

Sure.

Ron Epstein, Bank of America.

Just a couple of questions to follow-up on the Cessna line of questioning.

Scott, can you give us some sort of feel for how demand is for the Latitude?

I know it was received well but is there any maybe color you can put around that or numbers or something?

We haven't been giving order book specifically by model.

We have a number of orders already in the book for Latitude for sure.

But I think as we've talked about before at this stage of the game we really need to have aircraft that are flying and fully outfitted and able to do demos and things of that nature to really stir to build out that order book into 2015.

We have the initial aircraft that is up and flying.

We have a couple more that are in process, including one of the aircraft which will be fully outfitted with the real interior design and that will be the aircraft which will be going to shows and starting to perform customer demos.

And I think that we won't see a lot of order activity until that aircraft is out there because at this stage of the cycle I think before somebody lays a deposit on a $16 million, $17 million airplane they want to see the real airplane and sit in the airplane and take a flight in the airplane.

We understand that and we have the first couple aircraft obviously are more dedicated to flight test programs.

But we are in the process of building out the first one that will be a customer demo aircraft.

Okay.

And then maybe shifting gears a little bit.

How is it, is there an early read yet on how the move into flight simulation has gone with the integrated product, last time I was up in Rhode Island we were talking about how Textron wants to offer an integrated package to the customers with flight simulation.

And how is that going?

I'd say right now we are very happy with how it is going.

Our order rate on the simulator side of the business is doing very well.

There's a ton of opportunities out there in both the commercial air transport market as well as a number of different business jets and helicopter programs.

We already have our first development underway to support one of our own products, that being the Bell 525 simulator.

So the team down in Florida has already started to work with the Bell team in the design and development of the 525 sim.

And so I'd say obviously we are only a few months into this thing, but I feel very good about where we are.

The thing is performing as we expected and the order rates seem to be pretty good.

Okay, great and maybe one last one, back to defense.

My favorite product, the Scorpion.

Last time we spoke you had mentioned that maybe by the end-of-the-year a customer would emerge.

How do you feel about that still and how is that program going.

The program is going extremely well.

The aircraft is flying terrifically.

It is already over last week exceeded its flight envelope, so we have seen speeds in excess of what we were advertising and still had more throttle push for the thing so the aircraft is flying very well.

The guys are super happy with it and it's where we expected to be.

We have a lot of marketing sales activity underway right now.

We have conversations going on with a number of different customers.

We've had customers that have actually come into Wichita to see the aircraft, so I feel pretty good about where we are.

But there's a big ways to go to get from that to where somebody signs the dotted line and actually places an order for the aircraft.

By the end of this year I still think that's a possibility.

We are working hard to try to make that happen, but I'd say there's still a lot of work to make it happen.

Okay, great.

Thank you.

Sure.

Justin Bergner, Gabelli and Company.

Two questions.

First question is in regards to Cessna after market, I realize that's something that you report in more detail annually than quarterly, but how is it tracking as we finish the first quarter and enter the second quarter?

It continues to track positively, I'd say it is probably up mid single digit numbers.

Nothing out of the ordinary there?

No, and for that business Justin, if it just continues to march along at that rate, that's very healthy.

Because it really is driven by aircraft utilization and people coming in for service activity and whatnot.

So that's one where you expect to see nice steady growth.

That's what we have been seeing and expect to continue to see on the Cessna side.

And frankly, we expect and just kind of factor that in as well in terms of Hawker and King Air side of the business.

Great, and my second question is a little bit more general.

You've been in your role now for around four years and you're really taking a big step forward and consolidating the private aviation market with this Beechcraft acquisition.

What is the company going to look like in three years from now and what would make you disappointed three years from now if something doesn't transpire as you expect it to?

I think Justin if you look at what's really going to drive the business over the next few years, particularly within the aerospace aviation side of this, be that the aviation segment or Bell, is obviously doing something like the Beech acquisition is a big deal.

But I think over the next few years what's really going to drive our success in large part has to do with driving these new product programs, so we have the Latitude hitting in 2015.

We've got a lot of other activity at Cessna we will talk about in the future in terms of new products and when you look over at Bell you got the 525, the 505.

I think these are big programs that I think are resulting in products that are going to drive a lot of demand and share for our businesses and the market.

Those investments we are making, which are pretty significant right now, really are the things that are going to drive our performance improvements over the next few years.

Okay.

Thank you, and it is interesting to hear you talk about new product.

With respect to Beechcraft, clearly that is an investment that is as large as many of the combined new product investments you are making.

What would be the upside scenario in Beechcraft and is it as likely now as it was when you announced the deal?

We certainly feel just as good about it as when we announced it.

The market we think is still performing well for the King Air product line.

It is a great product.

It is always been very well received.

Customers like it and it is a workhorse in that industry.

Obviously it is going to require sustained levels of new product investment in R&D and upgrades and just like the jet business does.

So there are things that are announced out there that will be upgrades to that product line as it moves forward.

But I think what we thought we were acquiring in terms of that product is exactly what we got.

There have been no surprises whatsoever.

I think the brand is still in very good shape.

It is a strong brand in the marketplace, good demand for the product and it is a great product.

It is exactly what we expected.

Great.

Thank you and good luck for the rest of the year.

Thanks.

George Shapiro, Shapiro Research.

Yes, just to follow-up Frank, to a question earlier.

So in the fourth quarter you had $0.20 of operating benefit and $0.35 of restructuring for $0.15 dilution and now we got $0.08, so if you just -- what's changed in that?

Yes, the restructuring number is smaller than the cost that we had thought at the time that we did it.

So I think that that's the big delta George is the restructuring charges have come down a bit.

Okay.

And the operating number is about the same because it closed the same time you thought it would close?

Yes.

The operating -- those were annualized numbers versus partial year numbers and so that has an impact.

As we indicated at the time we were going to have purchase price gross margin impact.

We've refined the number, that's now expected to be about $65 million for the year, so I think it is largely a function of the partial year versus the annualization and then a little bit of a change on that restructuring number.

Then just a follow-up Scott for you on the margin.

Is your comment that the margin won't go up a lot necessarily in subsequent quarters because the first quarter was somewhat high because of the high level of Sovereign deliveries which won't repeat?

I think the margin rates will be incrementally better, George, because we will have obviously Sovereign, although Sovereign is probably a little stronger in the first quarter than the balance of year because of the rollover for Q4.

But then we also have the 10s based on now getting the certification done.

The volumes will be up slightly through the balance of the year and I think the margin mix will be favorable, so we will see some incrementally better margins.

I was trying to follow-up to Cai's point arguing that I agree with his comment that incrementally you would think the margins, your guidance for the year would be low.

So I was just trying to argue that maybe the first quarter was a little bit higher because of the Sovereigns, otherwise I still think -- I agree the margin is probably -- your guidance is probably low for the year.

There's no question we had a lot of Sovereigns in the quarter, we probably won't have quite that number of Sovereigns on a go-forward basis.

We will have the 10s so I think we are just having a friendly debate about how much better should they be.

Okay.

George, thanks a lot and ladies and gentlemen, that concludes our call.

Thank you for joining us and we will see you next quarter.

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